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May 21, 2012

Adoption of innovations and path dependence

A few articles recently came up that clearly demonstrate some of the basic concepts of technological innovation. So let's see what I can do...

First, as the folks at the Breakthrough Institute explain, one of the key factors for technological innovation is in bringing down prices of technologies and their inputs. This is extremely relevant for clean-tech innovation, because one could argue that there is no way people will buy clean energy en masse if its more expensive than fossil-fuel-based energy. Unless clean energy proponents can demonstrate a substantial improvement in the end product, consumers aren't willing to pay more. Traditional economics tells us that this means the government should subsidize clean energy or tax fossil fuels in order to account for the positive/negative externalities, but Breakthrough makes a more compelling argument that we should invest in new technologies and consider technology a cause, rather than effect, of economic growth.

So what happens when innovation creates new inputs (cheaper energy, new drugs, better crops)? People adopt them, of course. Not all innovations are adopted; I went to a talk last year where the speaker said something like, "people have a million reason not to adopt an innovation, and only a few reasons to adopt it." The context was why people don't adopt things that we consider universally good, such as medicines, etc., especially in developing countries. But in general, an innovation that gains traction follows a standard pattern of adoption, as explained here (h/t Arijit). Since the comments on that article complained of the academic language, here it is in the simplest terms: 1) more innovative/networked/wealthier people adopt new technologies first, 2) other people see how cool/useful the innovations are and start adopting it themselves, and 3) adoption of that innovation reaches a "tipping point" where you just can't live without it. For example, once all farmers started growing hybrid corn, its much more difficult to not grow it because they will outcompete you. Also think about cell phones- those few people holding out without a cell (or smartphone, to a lesser extent) have more and more problems functioning in a wireless world.

But what happens when, for some reason or other, the wrong technologies got adopted? For example, we find out that the chemical we've been putting in furniture as a flame-retardant is actually harmful to human health? Regardless of why we decided to use that chemical, by this point its passed the tipping point and has now achieved path dependence. Path dependence is where you're literally stuck producing things in a certain way. For example, we fill our cars with gasoline not just because its cheaper, but because there is a lack of alternative infrastructure for other fuels or types of engines/cars. So this flame retardant, although maybe it was initially more expensive, is now a cheap way for furniture producers to claim their products as "flame retardant," and the chemical companies are more than happy to keep producing the same cheap chemicals. This is a fundamental problem technologies, and is called technological lock-in. Because one technology dominates, it limits our scope of future options. This concept is incredibly important to many fields, including agriculture, health, and energy, yet remains poorly understood.